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Market Watch The Kamikaze Debt Bomb Signals the End of the Carry Trade…
Market Watch The Kamikaze Debt Bomb Signals the End of the Carry Trade… 
Market Watch
| Some financial commentators – including our old friend Marc Faber – are beginning to see the Fed’s emergency rate cut last Friday as “Bernanke’s first big mistake.” | |
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| The Kamikaze Debt Bomb Signals the End of the Carry Trade… |
| Wednesday, 22 August 2007 | ||||||||
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The carry trade is when a money manager borrows at low interest rates, commonly in yen (0.5%), and buys higher yielding assets in dollars, euros or some other currency like the Australian dollar (6.5%). That’s fine as long as the cost of borrowing yen is stable or falling and the higher yielding assets are worth the risk. In light of the subprime meltdown, those two assumptions are no longer valid. Costs are up all over… The backlash against bad mortgage debt has bounced around the globe. The moneymen are selling all high-risk assets at the drop of a boushi. Federal banks around the world are suddenly moving interest rates, which in turn causes massive fluctuations in exchange rates. JP Morgan Chase & Co.'s index of volatility on options for the most traded currencies hit an eight-year high mark of 13.4% last week. Things are so bad for those caught on the wrong side of the trade that Bloomberg is reporting that John W. Henry, owner of the Boston Red Sox, lost $479 million since November. The Great Unwind The good news is that the unwinding of the carry trade has a long way to go. Every excessive liquidity bubble ends with a body or two. (Think Worldcom, Enron, Tyco and the like.) I think I found the loser in the Japanese subprime category. It’s called Orix. The $18 billion company is a complicated Japanese firm that is 80% owned by Yankees or other gaijin. The company’s business model is based on the carry trade. Orix borrows over 60% of its money at low, floating rates in Japan, while investing in now-questionable products that return higher yields. Over the past five years, this strategy (along with one-off sales of assets) has made Orix a market darling among the free cash flow crowd. Profits have gone from a negative 31% in 2001 to making a positive 126%, 51%, 63% and 27% over the last four years. Just this week the company announced negative earnings that if you extrapolate would put them at a negative 29% for the year. Orix is getting crushed due to the end of cheap Japanese funding. But the real story is that the gaijin shareholder base doesn’t understand that Orix is up to its eyeballs in collateralized debt obligations (CDOs), subprime hedge funds, private equity and illiquid and obscure offshore assets.For example, the top five holdings are Loan trust beneficiaries, OIFS Cayman Limited Partnership, OIC Limited Partnership, OPE Partners No. 2 Investment Opportunity, and Momiji Silent Partnership. The list goes on to contain $4.86 billion in assets of translucent assets. The total market cap of Orix is a little more than $18 billion.
The chart looks horrible. The next support is $90, after that it’s $45. I haven’t seen a large-cap chart look this bad since Enron. But wait, it gets better…Orix has been able to sell to New York moneymen through a top-notch investor relation’s guy who was fantastic at translating Orix’s business model and filings to willing buyers. The internal relations guy just left the company within the last two weeks. It is a likely bet that Orix is going below $30, if not below $3. Kind Regards, Christian DeHaemer Source : TFN
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